UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended ~~June 30, 2021~~March 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _________________to _______________________

Commission file number: 001-38738

ETON PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware		37-1858472
(State of incorporation)		(I.R.S. Employer Identification Number)

21925 W. Field Parkway, Suite 235

Deer Park, Illinois60010-7278

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (847) 787-7361

Securities registered pursuant to Section 12(b) of the Act		Trading Symbol		Name of each exchange on which registered
Common stock, $0.001 par value per share		ETON		Nasdaq Global Market

Indicate by check mark whether the ~~Registrant~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the ~~Registrant~~registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated ~~Filer~~filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 9, 2021,~~April 30, 2022, Eton Pharmaceuticals, Inc. had outstanding ~~24,600,175~~25,224,452 shares of common stock, $0.001 par value.

Eton Pharmaceuticals, Inc.

TABLE OF CONTENTS

Part No	Item No	Description	Page No.	Item No	Description	Page No.

I		FINANCIAL INFORMATION	1		FINANCIAL INFORMATION	1

	1	Financial Statements	1

		Condensed Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020	1	1	Financial Statements	1

		Unaudited Condensed Statements of Operations for the three and six months ended June 30, 2021 and 2020	2		Condensed Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	1

		Unaudited Condensed Statements of Stockholders’ Equity for the three months ended June 30, 2021 and 2020	3		Unaudited Condensed Statements of Operations for the three months ended March 31, 2022 and 2021	2

		Unaudited Condensed Statements of Stockholders’ Equity for the six months ended June 30, 2021 and 2020	4		Unaudited Condensed Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021	3

		Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2021 and 2020	5		Unaudited Condensed Statements of Cash Flows for the three months ended March 31, 2022 and 2021	4

		Notes to Condensed Financial Statements	6		Notes to Condensed Financial Statements	5

	2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25	2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	3	Quantitative and Qualitative Disclosures About Market Risk	30	3	Quantitative and Qualitative Disclosures About Market Risk	28

	4	Controls and Procedures	31	4	Controls and Procedures	29

II		OTHER INFORMATION	32		OTHER INFORMATION	30

	1	Legal Proceedings	32	1	Legal Proceedings	30

	1A	Risk Factors	32	1A	Risk Factors	30

	2	Unregistered Sales of Equity Securities and Use of Proceeds	32	2	Unregistered Sales of Equity Securities and Use of Proceeds	30

	3	Defaults Upon Senior Securities	32	3	Defaults Upon Senior Securities	30

	4	Mine Safety Disclosures	32	4	Mine Safety Disclosures	30

	5	Other Information	32	5	Other Information	30

	6	Exhibits	32	6	Exhibits	30

		Index to Exhibits	33		Index to Exhibits	30

		Signatures	34		Signatures	31

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eton Pharmaceuticals, Inc.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

	June 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
		(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	25,802		$	21,295		$	15,229		$	14,406
Accounts receivable, net		303			48			796			5,471
Inventories		1,242			1,242			510			550
Prepaid expenses and other current assets		1,728			2,116			2,216			3,177
Total current assets		29,075			24,701			18,751			23,604

Property and equipment, net		156			811			109			115
Intangible assets, net		500			575			4,240			3,621
Operating lease right-of-use assets, net		143			192			84			104
Other long-term assets, net		32			40			12			21
Total assets	$	29,906		$	26,319		$	23,196		$	27,465

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,522		$	2,344		$	2,131		$	1,774
Current portion of long-term debt		749			—			—			1,418
PPP loan, current portion		—			280
Accrued liabilities		835			1,170			1,351			1,366
Total current liabilities		3,106			3,794			3,482			4,558

Long-term debt, net of discount and including accrued fees		5,856			6,532			6,331			5,262
Long-term portion of PPP and EIDL loans		150			231
Operating lease liabilities, net of current portion		58			99			—			15

Total liabilities		9,170			10,656			9,813			9,835

Commitments and contingencies (Note 12)		-
Commitments and contingencies (Note 11)								-			-

Stockholders’ equity
Common stock, $0.001 par value; 50,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 24,600,175 and 24,312,808 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		25			24
Common stock, $0.001 par value; 50,000,000 shares authorized; 24,626,004 shares issued and outstanding at March 31, 2022 and December 31, 2021								25			25
Additional paid-in capital		109,769			107,797			112,801			111,718
Accumulated deficit		(89,058	)		(92,158	)		(99,443	)		(94,113	)
Total stockholders’ equity		20,736			15,663			13,383			17,630

Total liabilities and stockholders’ equity	$	29,906		$	26,319		$	23,196		$	27,465

The accompanying notes are an integral part of these condensed financial statements.

Eton Pharmaceuticals, Inc.

Condensed Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	2021			2020			2021			2020
	For the three months ended						For the six months ended						For the three months ended
	June 30,			June 30,			June 30,			June 30,			March 31,			March 31,
	2021			2020			2021			2020			2022			2021
Revenues:
Licensing revenue	$	2,500		$	—		$	14,000		$	—		$	—		$	11,500
Product sales and royalties		567			20			964			119			2,176			397
Total net revenues		3,067			20			14,964			119			2,176			11,897

Cost of sales:
Cost of sales
Licensing revenue		—			—			1,500			—			—			1,500
Product sales and royalties		136			28			226			130			718			90
Total cost of sales		136			28			1,726			130			718			1,590

Gross profit (loss)		2,931			(8	)		13,238			(11	)
Gross profit														1,458			10,307

Operating expenses:
Research and development		1,990			1,609			2,876			7,877			1,618			886
General and administrative		3,266			2,921			7,324			5,531			4,927			4,058
Total operating expenses		5,256			4,530			10,200			13,408			6,545			4,944

(Loss) income from operations		(2,325	)		(4,538	)		3,038			(13,419	)		(5,087	)		5,363

Other (expense) income:
Interest and other (expense) income, net		(237	)		(192	)		(484	)		(360	)
Gain on PPP loan forgiven		365			—			365			—
Gain on equipment sale		181			—			181			—
Other expense:
Interest and other expense, net														(243	)		(247	)

(Loss) income before income tax expense		(2,016	)		(4,730	)		3,100			(13,779	)		(5,330	)		5,116

Income tax expense		—			—			—			—			—			—

Net (loss) income	$	(2,016	)	$	(4,730	)	$	3,100		$	(13,779	)	$	(5,330	)	$	5,116
Net loss (income) per share, basic	$	(0.08	)	$	(0.23	)	$	0.12		$	(0.70	)
Net loss (income) per share, diluted	$	(0.08	)	$	(0.23	)	$	0.12		$	(0.70	)
Net (loss) income per share, basic													$	(0.21	)	$	0.21
Net (loss) income per share, diluted													$	(0.21	)	$	0.19
Weighted average number of common shares outstanding, basic		25,211			21,005			25,133			19,574			25,301			24,453
Weighted average number of common shares outstanding, diluted		25,211			21,005			26,486			19,574			25,301			26,547

The accompanying notes are an integral part of these condensed financial statements.

Eton Pharmaceuticals, Inc.

Condensed Statements of Stockholders’ Equity

For the three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~

(in thousands, except share amounts)

(Unaudited)

Shares Amount Capital Deficit Equity
Common Stock Additional Paid-in Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Balances at March 31, 2021 24,482,616 $ 24 $ 108,573 $ (87,042 ) $ 21,555

Stock-based compensation — — 836 — 836

Stock option exercises 63,233 226 — 226

Employee stock purchase plan 29,326 — 134 — 134

Common stock issued related to restricted stock units 25,000 — — — —
Proceeds from sales of common stock, net of offering costs
Proceeds from sales of common stock, net of offering costs, shares
Warrant exercises
Warrant exercises, shares
Issuance of common stock for product candidate licensing rights
Issuance of common stock for product candidate licensing rights, shares

Net loss — — — (2,016 ) (2,016 )

Balances at June 30, 2021 24,600,175 $ 25 $ 109,769 $ (89,058 ) $ 20,736

Common Stock Additional Paid-in Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Balances at December 31, 2021 24,626,004 $ 25 $ 111,718 $ (94,113 ) $ 17,630

Stock-based compensation — — 1,083 — 1,083

Net loss — — — (5,330 ) (5,330 )

Balances at March 31, 2022 24,626,004 $ 25 $ 112,801 $ (99,443 ) $ 13,383

Common Stock Additional Paid-in Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Balances at March 31, 2020 20,761,960 $ 21 $ 83,836 $ (73,237 ) $ 10,620

Stock-based compensation 15,190 — 714 — 714

Stock option exercises 64,878 66 — 66

Employee stock purchase plan 14,005 — 64 — 64

Proceeds from sales of common stock, net of offering costs 100,000 — 297 — 297

Net loss — — — (4,730 ) (4,730 )

Balances at June 30, 2020 20,956,033 $ 21 $ 84,977 $ (77,967 ) $ 7,031
Common Stock Additional Paid-in Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Balances at December 31, 2020 24,312,808 $ 24 $ 107,797 $ (92,158 ) $ 15,663

Stock-based compensation — — 673 — 673

Stock option exercises 75,000 — 103 — 103

Warrant exercises 94,808 — — — —

Net income — — — 5,116 5,116
Net income (loss) — — — 5,116 5,116
Balances at March 31, 2021 24,482,616 $ 24 $ 108,573 $ (87,042 ) $ 21,555

The accompanying notes are an integral part of these condensed financial statements.

3

~~Eton Pharmaceuticals, Inc.~~
~~Condensed Statements of Stockholders’ Equity~~
~~For the six months ended June 30, 2021 and 2020~~
~~(in thousands, except share amounts)~~
~~(Unaudited)~~
Common Stock Additional Paid-in Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Balances at December 31, 2020 24,312,808 $ 24 $ 107,797 $ (92,158 ) $ 15,663

Stock-based compensation — — 1,509 — 1,509

Stock option exercises 138,233 1 329 — 330

Employee stock purchase plan 29,326 — 134 — 134

Common stock issued related to restricted stock units 25,000 — — — —

Warrant exercises 94,808 — — — —

Net income — — — 3,100 3,100

Balances at June 30, 2021 24,600,175 $ 25 $ 109,769 $ (89,058 ) $ 20,736
Common Stock Additional Paid-in Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Balances at December 31, 2019 17,877,486 $ 18 $ 74,720 $ (64,188 ) $ 10,550
Beginning balance 17,877,486 $ 18 $ 74,720 $ (64,188 ) $ 10,550

Stock-based compensation 15,190 — 1,079 — 1,079

Stock option exercises 69,878 97 — 97

Employee stock purchase plan 14,005 — 64 — 64

Proceeds from sales of common stock, net of offering costs 2,600,000 3 7,753 — 7,756

Issuance of common stock for product candidate licensing rights 379,474 — 1,264 — 1,264

Net loss — — — (13,779 ) (13,779 )

Balances at June 30, 2020 20,956,033 $ 21 $ 84,977 $ (77,967 ) $ 7,031
Ending balance 20,956,033 $ 21 $ 84,977 $ (77,967 ) $ 7,031
~~The accompanying notes are an integral part of these condensed financial statements.~~
4
Eton Pharmaceuticals, Inc.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)

Six months ended June 30, 2021
Six months ended
June 30, 2020
Three months
ended
March 31, 2022
Three months
ended
March 31, 2021

Cash flows from operating activities
Net income (loss) $ 3,100 $ (13,779 )
Net (loss) income $ (5,330 ) $ 5,116

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock-based compensation 1,509 1,079 1,083 673
Common stock issued for product candidate licensing rights — 1,264
Depreciation and amortization 240 326 181 155
Debt discount amortization 73 50 36 36
Gain on forgiveness of debt (365 ) —
Gain on sale of equipment (181 ) —
Changes in operating assets and liabilities:
Accounts receivable (255 ) 473 4,675 (252 )
Inventories — (1,329 ) 40 (106 )
Prepaid expenses and other assets 419 1,251 961 (846 )
Accounts payable (822 ) 1,378 (393 ) (583 )
Accrued liabilities (372 ) (783 ) (30 ) (478 )
Net cash used in operating activities 3,346 (10,070 )
Net cash provided by operating activities 1,223 3,715

Cash provided by (used in) investing activities
Proceeds from sale of equipment 700 —
Cash used in investing activities
Purchases of property and equipment (3 ) (4 ) (15 ) —
Net cash provided by (used in) financing activities 697 (4 )
Net cash used in investing activities (15 ) —

Cash flows from financing activities
Proceeds from sales of common stock, net of offering costs — 7,756
Proceeds from PPP loan — 361
Proceeds from employee stock purchase plan and stock option exercises 464 161
Net cash provided by financing activities 464 8,278
Repayment of long-term debt (385 ) —
Proceeds from employee stock option exercises — 103
Net cash (used in) provided by financing activities (385 ) 103

Change in cash and cash equivalents 4,507 (1,796 ) 823 3,818
Cash and cash equivalents at beginning of period 21,295 12,066 14,406 21,295
Cash and cash equivalents at end of period $ 25,802 $ 10,270 $ 15,229 $ 25,113

Supplemental disclosures of cash flow information
Cash paid for interest $ 424 $ 358 $ 215 $ 214
Cash paid for income taxes $ — $ — $ — $ —

Supplemental disclosures of non-cash investing activities:
Payable for product license fee $ 750 $ —

The accompanying notes are an integral part of these condensed financial statements.

5 4

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 1 — Company Overview

Eton Pharmaceuticals, Inc. (“Eton” or the “Company”) was incorporated as a Delaware “C” corporation on April 27, 2017 and was initially set up as a wholly-owned subsidiary of Harrow Health, Inc. (“Harrow”, fka Imprimis Pharmaceuticals, Inc.). In June 2017, the Company raised $20,055 in start-up capital through a private sale of preferred stock and a separate management team was then established for Eton with its corporate offices located in Deer Park, Illinois. In November 2018, the Company completed its initial public offering (the “IPO”) and received net proceeds of $21,960, after deducting underwriting discounts and commissions and offering-related expenses. In November 2019, the Company entered into a credit agreement and received net proceeds of $4,750 and in August 2020 the Company received net proceeds of $1,965 under the credit agreement (see Note 5). In March and April 2020, Eton received net proceeds of $7,756 from the sale of shares of its common stock in a private placement and in October 2020, the Company received net proceeds of $21,026 from a public offering for its common stock at an offering price of $7.00 per share.

Eton is ~~a specialty~~an innovative pharmaceutical company focused on developing, acquiring, and commercializing innovative ~~products. Eton is primarily focused on hospital injectable and pediatric~~products to treat rare ~~disease products.~~diseases. The Company seeks to improve the formula, delivery system, or safety of existing molecules in order to address unmet patient needs. Eton pursues what it perceives to be low-risk product candidates where existing published literature, historical clinical trials, or physician usage has established safety and/or efficacy of the molecule, thereby reducing the incremental clinical burden required for the Company to bring the product to patients.

The Company’s Biorphen® product was approved by the FDA in October 2019 and sales commenced for this product at the end of 2019. Eton’s EM-100 product was sold to Bausch Health and the product was approved by the FDA in September 2020. Bausch Health launched this product under the name of Alaway® Preservative Free in January 2021 and Eton ~~will receive~~receives royalties from the sale of the product. ~~In addition, the~~The Company acquired the licensing rights to Alkindi ~~Sprinkle~~Sprinkle® and this product was approved by the FDA in October 2020 and launched in December 2020. The Company entered into a co-promotion agreement with Tolmar Pharmaceuticals in November 2021 whereby Tolmar will promote Alkindi Sprinkle through its salesforce in exchange for a royalty on net sales. In February 2021, the Company sold three pediatric neurology products it had under development to Azurity Pharmaceuticals (“Azurity”) and anticipates additional revenues from Azurity based on various product-related milestones including the commercial launch for two of these products which are currently under review with the FDA. Azurity launched one of the three products, Eprontia, in December 2021. In addition, the Company launched Carglumic Acid tablets in December 2021 as the first and only FDA-approved generic version of Carbaglu®. In March 2022, the Company’s U.S. marketing partner, XGen Pharmaceuticals (“XGen”) launched Rezipres® (a ready-to-use form of injectable ephedrine) and the Company receives a profit share on the sale of the Rezipres product.

Note 2 — Liquidity Considerations

~~In the first six months of 2021,~~To date, the Company has generated ~~net cash provided by operating activities of $3,346~~ ~~primarily~~revenues from ~~the initial proceeds from the sale of three neurology products. The Company~~six products and expects further growth in ~~2021~~2022 and beyond in accordance with additional market penetration from ~~its approved~~these products plus ~~additional~~ revenues from licensing and additional products where it anticipates FDA approval.~~Prior to 2021, the Company had generated limited revenues and had incurred negative cash flows from operating activities since its inception in 2017.~~

The Company currently believes its existing cash and cash equivalents of $~~25,802~~15,229 as of ~~June 30, 2021~~March 31, 2022 will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next twelve months from the date of filing of this quarterly report. This estimate is based on the Company’s current assumptions, including assumptions relating to estimated sales and its ability to manage its spending. The Company could use its available capital resources sooner than currently expected. Accordingly, the Company could seek to obtain additional capital through equity financings, the issuance of debt or other arrangements. However, there can be no assurance that the Company will be able to raise additional capital if needed or under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders and newly issued shares could contain senior rights and preferences compared to currently outstanding common shares. The Company’s existing long-term debt obligation contains covenants and limits the Company’s ability to pay dividends or make other distributions to stockholders. If the Company experiences delays in product sales growth and completing its product development and obtaining regulatory approval for its other product candidates and is unable to obtain such additional financing, operations would need to be scaled back or discontinued.

~~Note 3 —~~ ~~Summary of Significant Accounting Policies~~
~~Basis of Presentation~~
~~The Company has prepared the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).~~
6 5

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies ~~(continued)~~

Basis of Presentation
The Company has prepared the accompanying condensed financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Unaudited Interim Financial Information

The accompanying interim condensed financial statements are unaudited and have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company’s financial position as of ~~June 30, 2021~~March 31, 2022 and the results of its operations and its cash flows for the periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021. The financial data and other information disclosed in these notes related to the ~~three and six-month~~three-month periods ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ are also unaudited. The results for the ~~six-month~~three-month period ended ~~June 30, 2021~~March 31, 2022 are not necessarily indicative of results to be expected for the year ending December 31, ~~2021,~~2022, any other interim periods or any future year or period.
Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, provisions for uncollectible receivables and sales returns, valuation of inventories, useful lives of assets and the impairment of property and equipment, the accrual of research and development expenses and the valuation of common stock, stock options and warrants. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates or assumptions.

Segment Information

The Company operates the business on the basis of a single reportable segment, which is the business of developing and commercializing prescription drug products. The Company’s chief operating decision-maker is the Chief Executive Officer (“CEO”), who evaluates the Company as a single operating segment.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. All cash and cash equivalents are held in U.S. financial institutions or invested in short-term U.S. treasury ~~bills. Cash equivalents consist~~bills or high-grade money market funds. As of ~~an interest-bearing checking~~March 31, 2022, all of the Company’s cash is in a non-interest bearing account ~~and a U.S. treasury bill.~~due to the current low-interest rate environment. From time to time, amounts deposited with its bank exceed federally insured limits. The Company believes the associated credit risk to be minimal.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are recorded net of allowances for doubtful accounts, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances. The total for these reserves amounted to $85132 and $7196 as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Inventories

The Company values its inventories at the lower of cost or net realizable value using the first-in, first-out method of valuation. The Company reviews its inventories for potential excess or obsolete issues on an ongoing basis and will record a write-down if an impairment is identified. Inventories at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 consist solely of purchased finished goods. At ~~both June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 inventories are shown net of a ~~slow-moving~~ reserve for its Biorphen product of $1,284 and $~~623~~1,414, respectively due to the risk of expiry before this entire stock of inventories is sold.

7 6

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and equipment is computed utilizing the straight-line method based on the following estimated useful lives: computer hardware and software is depreciated over three years; equipment, furniture and fixtures is depreciated over five years; leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. Construction in progress is capitalized but not depreciated until it is placed into service.

Maintenance and repairs are charged to expense as incurred, while renewals and improvements are capitalized.

In March 2021, the Company completed an evaluation of its expected needs for product development and testing activities and determined that it would discontinue its laboratory operation in Lake Zurich, Illinois. The Company completed a sale of the lab equipment in May 2021 at a price of $~~700~~Intangible Assets~~which was $181~~ ~~in excess of the book value for these assets. Accordingly, the $519net book value of these assets was removed from the property and equipment accounts and the $181~~ gain is reflected in the Company’s statements of operations for the three and six-month periods ended June 30, 2021. In conjunction with the closing of its laboratory operation, the Company scrapped various furniture and equipment which had a net book value of $31 ~~which has been included in research and development expense in the statements of operations.~~

~~Intangible Assets~~
The Company capitalizes payments it makes for licensed products when the payment is based on the FDA approval for the product and the cost is recoverable based on expected future cash flows from the product. The cost is amortized on a straight-line basis over the estimated useful life of the product commencing on the approval date in accordance with Accounting Standards Codification (“ASC”) 350 — Intangibles - Goodwill and Other. A $750payment related to the approval of the Company’s Biorphen product in 2019 has been capitalized and that cost is being amortized over five ~~years.~~years. In November 2021, the Company purchased the rights for its Carglumic Acid product for $3,250 and that cost is being amortized over ten years. During the first quarter of 2022, the Company capitalized a $750 fee for its Rezipres product and that cost is being amortized over five years. The intangible assets, net on the Company’s balance sheet reflected $~~250~~510 of accumulated amortization as of ~~June 30, 2021.~~March 31, 2022. The Company recorded $37 ~~and $~~75131 of amortization expense for the three ~~and six~~ months ended ~~June 30, 2021, respectively.~~March 31, 2022. The ~~Company will record~~table below shows the estimated remaining amortization ~~expense~~for these products for each of $~~150~~ ~~per year for this intangible asset for 2021 through 2023~~the five years from 2022 to 2026 and ~~then $125in 2024 when it will be fully amortized.~~thereafter.
Schedule of Intangible Assets Amortization Expense
Year
Amortization
Expense

Remainder of 2022 469
2023 625
2024 600
2025 475
2026 475
Thereafter 1,596
Total estimated amortization expense
4,240

Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the Company’s statements of operations for the amount by which the carrying amount of the asset exceeds the fair value of the asset. NaN impairment has been recognized since the Company’s inception in 2017.

Debt Issuance Costs and Debt Discount and Detachable Debt-Related Warrants

Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts ~~relate~~related to the relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest method.

7
Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)
Note 3 — Summary of Significant Accounting Policies (continued)

Revenue Recognition for Contracts with Customers

The Company accounts for contracts with its customers in accordance with ASC 606 — Revenue from Contracts with Customers. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

~~Eton Pharmaceuticals, Inc.~~

~~Notes to Condensed Financial Statements~~

(~~in thousands, except share and per share amounts)~~

~~(Unaudited)~~

~~Note 3 — Summary of Significant Accounting Policies (continued)~~

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses whether these options provide a material right to the customer and, if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes.

The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Any amounts received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized as revenue within the twelve months following the balance sheet date will be classified as current portion of deferred revenue in the Company’s balance sheets. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet date are classified as long-term deferred revenue, net of current portion.

Milestone Payments – If a commercial contract arrangement includes development and regulatory milestone payments, the Company will evaluate whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur before recognizing the associated revenue. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Significant Financing Component – In determining the transaction price, the Company will adjust consideration for the effects of the time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services to the licensees will be more than one year.

The Company sells Biorphen in the U.S. to wholesale pharmaceutical distributors, who then sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments of Biorphen represent performance obligations under each purchase order. The Company uses a third-party logistics (“3PL”) vendor to process and fulfill orders and has concluded it is the principal in the sales to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. The Company has no significant obligations to wholesalers to generate pull-through sales. In addition, the Company sells its Alkindi Sprinkle and Carglumic Acid product to one pharmacy distributor customer which provides order fulfilment and inventory storage/distribution services.

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sell Biorphen at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. In addition, the Company pays fees to wholesalers for their distribution services, inventory reporting and chargeback processing. The Company pays GPOs fees for administrative services and for access to GPO members and concluded the benefits received in exchange for these fees are not distinct from its sales of Biorphen, and accordingly it applies these amounts to reduce revenues. Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Biorphen and the Company’s lengthy return period, there may be a significant period of time between when the product is shipped and when it issues credits on returned product. For its Alkindi Sprinkle ~~product,~~and Carglumic Acid products, the Company bills at the initial product list price which are subject to offsets for patient co-pay assistance and potential state Medicaid reimbursements which are recorded as a reduction of net revenues at the date of sale/shipment.

~~Eton Pharmaceuticals, Inc.~~

~~Notes to Condensed Financial Statements~~

(~~in thousands, except share and per share amounts)~~

~~(Unaudited)~~

~~Note 3 — Summary of Significant Accounting Policies (continued)~~

The Company estimates the transaction price when it receives each purchase order taking into account the expected reductions of the selling price initially billed to the wholesaler/distributor arising from all of the above factors. The Company has developed estimates for future returns and chargebacks of Biorphen and the impact of the other discounts and fees it pays while Alkindi Sprinkle and Carglumic Acid sales to its distributor are not subject to returns. When estimating these adjustments to the transaction price, the Company reduces it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.

The Company recognizes revenue from Biorphen product sales and related cost of sales upon product delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership, and have an enforceable obligation to pay the Company. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, the Company does not believe they have a significant incentive to return the product. The Company stores its Alkindi Sprinkle and Carglumic Acid inventory at its pharmacy distributor customer location and sales are recorded when stock is pulled and shipped to fulfill specific patient orders.

Upon recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable. The Company monitors actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts end up differing from its estimates, it will make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment.

In addition, the Company ~~receives~~anticipates it will receive revenues from product licensing agreements where it has contracted for milestone payments and royalties from products it has developed or for which it has acquired the rights to a product developed by a third party.

Revenues for the three months ended ~~June 30,~~March 31, 2022 consisted of $2,153 of product sales and $23 in royalty revenue. Revenues for the three months ended March 31, 2021 reflected $~~2,500~~11,500 of licensing milestone fees, $~~493~~254 in product sales and $74143 in royalty revenue. ~~Revenues for the six months ended June 30, 2021 reflected $14,000~~ ~~of licensing milestone fees, $747~~ ~~in product sales and $217~~ ~~in royalty revenue. Revenues for the three and six months ended June 30, 2020 consisted solely of product sales.~~

Cost of Sales

Cost of sales consists of the profit-sharing and royalty fees with the Company’s product licensing and development partners, the purchase costs for finished products from third-party manufacturers and freight and handling/storage costs from the Company’s 3PL logistics service providers. The cost of sales for profit-sharing and royalty fees and costs for purchased finished products and the associated inbound freight expense is recorded when the associated product sale revenue is recognized in accordance with the terms of shipment to customers while outbound freight and handling/storage fees charged by the 3PL service provider are expensed as they are incurred. Cost of sales also reflects any write-downs or reserve adjustments for the Company’s inventories.

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Research and Development Expenses

Research and development (“R&D”) expenses include both internal R&D activities and external contracted services. Internal R&D activity expenses include salaries, benefits and stock-based compensation and other costs to support the Company’s R&D operations. External contracted services include product development efforts such as certain product licensor milestone payments, clinical trial activities, manufacturing and control-related activities and regulatory costs. R&D expenses are charged to operations as incurred. The Company reviews and accrues R&D expenses based on services performed and relies upon estimates of those costs applicable to the stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

Upfront payments and milestone payments made for the licensing of technology for products that are not yet approved by the FDA are expensed as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.

~~Eton Pharmaceuticals, Inc.~~

~~Notes to Condensed Financial Statements~~

(~~in thousands, except share and per share amounts)~~

~~(Unaudited)~~

~~Note 3 — Summary of Significant Accounting Policies (continued)~~

Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as unvested restricted stock, stock options and warrants that are outstanding during the period. Common stock equivalents are excluded from the computation when their inclusion would be anti-dilutive. ~~Common~~For the three-month period ended March 31, 2022 common stock equivalents of 5,110,852 are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive. For the three-month period ended March 31, 2021, common stock equivalents (using the treasury stock and “if converted” method) from stock options, unvested RSAs and warrants ~~at June 30, 2021~~ were ~~1,352,879~~2,093,952 and excluded ~~1,624,598~~729,692 shares that were ~~anti-dilutive (see Note 9).~~anti-dilutive. Included in the basic and diluted net income (loss) per share calculation are RSUs awarded to directors that have vested, but the issuance and delivery of the common shares are deferred until the director retires from service as a ~~director (see Note 8).~~

director. Basic weighted average shares for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 include 600,000 vested warrants to purchase common shares. As the shares underlying these warrants can be purchased for little to no consideration ($0.01 per share exercise price), they are included in the computation of basic earnings per share.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC — 718 — Compensation — Stock Compensation. The guidance under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant and record expense over the related service periods, which are generally the vesting period of the equity awards. The Company estimates the fair value of stock-based option awards using the Black-Scholes-Merton option-pricing model (“BSM”). The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods and the contractual life of the options. Expected volatilities are based on comparable companies’ historical volatility along with a limited weighting included for the Company’s own volatility, ~~subsequent to its IPO,~~ which management believes represents the most accurate basis for estimating expected future volatility under the current conditions. The Company accounts for forfeitures as they occur. The Company uses the closing common stock price on the date of grant for the fair value of the common stock.

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Fair Value Measurements

We measure certain of our assets and liabilities at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting requires characterization of the inputs used to measure fair value into a three-level fair value hierarchy as follows:

Level 1 — Inputs based on quoted prices in active markets for identical assets or liabilities. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Observable inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent from the entity.

Level 3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available.

Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values stated below take into account the market for the Company’s financials, assets and liabilities, the associated credit risk and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

~~Eton Pharmaceuticals, Inc.~~

~~Notes to Condensed Financial Statements~~

(~~in thousands, except share and per share amounts)~~

~~(Unaudited)~~

~~Note 3 — Summary of Significant Accounting Policies (continued)~~

The Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, ~~PPP loan~~ and long-term debt obligation. The carrying amounts of these financial instruments, except for the ~~PPP loan and~~ long-term debt obligation, approximate their fair values due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying value of the ~~PPP loan and~~ long-term debt obligation ~~approximate their~~approximates its fair ~~values.~~value.

Impact of New Accounting Pronouncements

There were no new accounting pronouncements issued by the FASB during the ~~current~~ period that would apply to the Company ~~and~~would have a material impact on its financial position or results of operations.

~~Subsequent Events~~

Eton Pharmaceuticals, Inc.

~~The Company has evaluated subsequent events through the filing date of this Form 10-Q~~Notes to Condensed Financial Statements

(in thousands, except share and has determined that no subsequent events have occurred that would require recognition in the condensed financial statements or disclosure in the notes thereto, except as disclosed in the notes to these condensed financial statements.per share amounts)

(Unaudited)

Note 4 —– Property and Equipment

Property and equipment consist of the following:

Schedule of Property and Equipment

	June 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Computer hardware and software	$	153		$	182		$	167		$	157
Furniture and fixtures		105			143			111			106
Equipment		132			994			132			132
Leasehold improvements		71			184			71			71
Property and equipment, gross		461			1,503			481			466
Less: accumulated depreciation		(305	)		(692	)		(372	)		(351	)
Property and equipment, net	$	156		$	811		$	109		$	115

Depreciation expense for the three-month periods ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ was $24 21and $8784~~, respectively. Depreciation expense for the six-month periods ended June 30, 2021 and 2020 was $108~~ ~~and $174~~, respectively. The ~~balances at June 30, 2021 reflect~~decrease in depreciation expense was associated with the closure of the Company’s laboratory facility and sale of ~~laboratory~~its equipment in ~~May 2021 which had a net book value of $519. In conjunction with the closing of its laboratory operation, the Company scrapped various furniture and equipment which had a net book value of $31,~~ ~~which is included in research and development expense in the statements of operations.~~2021.

Note 5 — ~~Long-Term~~Long Term Debt

SWK Loan

On November 13, 2019, the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Holdings Corporation (“SWK”) which provided for up to $10,000 in financing. The Company received proceeds of $5,000 at closing and was able to borrow an additional $5,000 upon the FDA approval of a second product developed by the Company, excluding EM-100. In March 2020, in conjunction with the Company’s Alkindi Sprinkle product licensing agreement (see Note ~~12)~~11) and the Company’s March 2020 sale of additional shares of its common stock, the Company and SWK amended the SWK Credit Agreement. The amendment provided the Company with the option to immediately draw ~~an additional~~ $2,000 and the ability to borrow an additional ~~$3,000~~$3,000 based upon the FDA approval of EM-100 and Alkindi Sprinkle which subsequently occurred in September 2020. Accordingly, the Company borrowed an additional $2,000 on August 11, 2020. The term of the SWK Credit Agreement is for five years and borrowings bear interest at a rate of LIBOR 3-month plus ~~10.0%~~10.0%, subject to a stated LIBOR floor rate of ~~2.0%~~2.0%. A ~~2.0%~~2.0% unused credit limit fee is assessed during the first twelve months after the date of the SWK Credit Agreement and loan fees include a ~~5.0%~~5.0% exit fee based on the principal amounts drawn which is payable at the end of the term of the SWK Credit Agreement. The Company iswas required to maintain a minimum cash balance of $3,000, ~~will~~ only pay interest on the debt until ~~February14,~~February 2022 and then ~~will~~ pay 5.5% of the loan principal balance commencing on February 15, 2022 and then every three months thereafter until November 13, 2024 at which time the remaining principal balance is due. Borrowings under the SWK Credit Agreement are secured by the Company’s assets.

~~Eton Pharmaceuticals, Inc.~~

~~Notes to Condensed Financial Statements~~

(~~in thousands, except share and per share amounts)~~

~~(Unaudited)~~

~~Note 5 — Long Term Debt (continued)~~

The SWK Credit Agreement contains customary default provisions and covenants which include limits on additional indebtedness. In March 2020, SWK provided a waiver for the Company to obtain loans with the Small Business Association. ~~The Company is currently in the process of negotiating covenant targets for EBITDA and revenue for the SWK Credit Agreement.~~ In February 2021, the Company notified SWK that it will not require additional borrowing capacity under the SWK Credit Agreement and terminated the additional borrowing capacity with ~~SWK.~~SWK.

In connection with the initial $5,000 borrowed in November 2019, the Company issued warrants to SWK to purchase 51,239 shares of the Company’s common stock with an exercise price of $5.86 per share. The relative fair value of ~~the~~ these 51,239 warrants was $226 and was estimated using ~~the Black-Scholes-Merton option pricing model~~BSM with the following assumptions: fair value of the Company’s common stock at issuance of $5.75 per share; ~~seven-year~~ seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 1.8%.

In connection with the additional $2,000borrowed in August 2020, the Company issued warrants for 18,141shares of its common stock at an exercise price of $6.62per share. The relative fair value of the 18,141 warrants was $94and was estimated using ~~the Black-Scholes-Merton option pricing model~~BSM with the following assumptions: fair value of the Company’s common stock at issuance of $6.85per share; ~~seven-year~~seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 0.4%.

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

Note 5 — Long Term Debt (continued)

These warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance. The SWK Warrants ~~contain~~are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to change in connection with stock splits, dividends, reclassifications and other conditions.

Interest expense of $~~513~~247 was recorded during the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, which included $7336 of debt discount amortization. Interest expense of $~~386~~264 was recorded during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, which included $5036 of debt discount amortization. As of ~~June 30, 2021,~~March 31, 2022, $64129 of accrued interest is included in accrued liabilities.

On April 5, 2022, the Company and SWK entered into an amendment to the SWK Credit Agreement which allowed for a deferral of loan principal payments until May 2023 and reduced the interest rate to LIBOR 3-month plus 8.0%, subject to a stated LIBOR floor rate of 2.0%. In accordance with the change, the Company has classified all the loan principal as long-term in its balance sheet at March 31, 2022.

The table below reflects the future payments for the SWK loan principal and interest as of ~~June 30, 2021.~~March 31, 2022.

Schedule of Future Payments of Long Term Debt

Amount
2021 $ 384
2022 2,202
2023 1,756
2024 5,300
Total payments 9,642
Less: amount representing interest (2,642 )
Loan payable, gross 7,000
Less: current portion of long-term debt (749 )
Less: unamortized discount (395 )
Long-term debt, net of unamortized discount $ 5,856

~~PPP loan~~
~~On May 4, 2020, the Company received $361~~ in loan proceeds under the Paycheck Protection Program (“PPP”) from the Small Business Administration (“SBA”) through its banking relationship with Bank of America. On May 20, 2021, the Company received notice that the loan principal and cumulative interest of $4 ~~was forgiven in full as permitted under the applicable SBA guidelines for PPP loans. The $365~~ ~~gain on debt extinguishment is reflected in non-operating income for the three and six-month periods ended June 30, 2021.~~
~~EIDL loan~~
~~On July 21, 2020, the Company received $150~~ ~~in loan proceeds under the Economic Injury Disaster Loan program (“EIDL”) from the SBA. The Company paid off the full EIDL loan principal and its cumulative interest of $~~6 ~~in July 2021.~~
Amount
2022 $ 499
2023 1,676
2024 6,452
Total payments 8,627
Less: amount representing interest (2,012 )
Loan payable, gross 6,615
Less: unamortized discount (284 )
Long-term debt, net of unamortized discount $ 6,331

13

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 6 — Common Stock

The Company has 50,000,000 authorized shares of $0.001 par value common stock under its Amended and Restated Certificate of Incorporation.

The Company did not have any stock issuance activity for the three-month period ended March 31, 2022. During the ~~six~~three months ended ~~June 30,~~March 31, 2021, the Company issued ~~138,233~~ 75,000shares of its common stock resulting from stock option exercises under its 2018 Equity Incentive Plan (see Note 8). ~~In April 2021, the Company issued~~ ~~25,000~~ ~~shares of common stock to a member of its board of directors upon his retirement from the board in connection with previously vested restricted stock units (“RSUs”).~~
During the ~~six~~three months ended ~~June 30,~~March 31, 2021, a holder of the Company’s common stock warrants exercised 135,650 warrants on a cashless basis and the Company issued 94,808 shares of its common stock in connection with the warrant exercise. The intrinsic value of ~~the~~that warrant exercise was $806.
~~In June 2021, the Company issued~~ ~~29,326~~ ~~shares of its common stock to employees in accordance with its Employee Stock Purchase Plan (“ESPP”)~~.

Note 7 — Common Stock Warrants

The Company’s outstanding warrants to purchase shares of its common stock at ~~June 30, 2021~~March 31, 2022 are summarized in the table below.
Summary of Warrants Outstanding
Description of Warrants No. of Shares Exercise Price No. of Shares Exercise Price
Business Advisory Warrants 600,000 $ 0.01 600,000 $ 0.01
Placement Agent Warrants – 2017 Preferred Stock Offering 471,446 $ 3.00 471,446 $ 3.00
Placement Agent Warrants - IPO 414,000 $ 7.50 414,000 $ 7.50
SWK Warrants – Debt – Tranche #1 51,239 $ 5.86 51,239 $ 5.86
SWK Warrants – Debt – Tranche #2 18,141 $ 6.62 18,141 $ 6.62
Total 1,554,826 $ 3.18(Avg ) 1,554,826 $ 3.18 (Avg)

The holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities Act of 1933, as amended (the “Securities Act”) for their shares that are converted to common stock, including demand registration rights and piggyback registration rights. These rights are provided under the terms of a registration rights agreement between the Company and the investors.
14

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 8 — Share-Based Payment Awards

The Company’s board of directors and stockholders approved the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan in May 2017 (the “2017 Plan”), which authorized the issuance of up to 5,000,000 shares of the Company’s common stock. In conjunction with the Company’s IPO in November 2018, the Company’s stockholders and board of directors approved the 2018 Equity Incentive Plan ~~(as~~(the “2018 Plan”), as amended, ~~in January 2021, the “2018 plan”)~~ which succeeded the 2017 Plan. The Company has granted restricted stock awards (“RSAs”), stock options and ~~RSUs~~restricted stock units (“RSUs”) for its common stock under the 2017 Plan and 2018 Plan as detailed in the tables below. There were ~~481,160~~443,888 shares available for future issuance under the 2018 Plan as of ~~June 30, 2021.~~March 31, 2022.

Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the 2018 Plan. In addition, the 2018 Plan provides that commencing January 1, 2019 and through January 1, 2028, the share reserve will be increased annually by 4% of the total number of shares of common stock outstanding as of the preceding December 31, subject to a reduction at the discretion of the Company’s board of directors. The exercise price for stock options granted is not less than the fair value of common stock as determined by the board of directors as of the date of grant. The Company uses the closing stock price on the date of grant as the exercise price.

~~During the third quarter of 2017, the Company issued~~ ~~25,000~~ ~~RSU’s to each of its four outside directors (100,000 total share units). The RSU’s issued to the outside directors were~~ ~~100% vested at June 30, 2018. The associated~~ ~~100,000~~ ~~shares of the Company’s common stock are not issued until the individual director retires from service from the Company’s board of directors. In April 2021,~~ ~~25,000~~ ~~of these vested RSU shares were issued to a director after his retirement from the Company’s board. The Company has not issued any additional RSU’s.~~
To date, all stock options issued have been non-qualified stock options, and the exercise prices were set at the fair value for the shares at the dates of grant. Options typically have a ~~ten-year~~ten-year life, except for options to purchase 50,000 shares of the Company’s common stock granted to product consultants in July 2017 that expire within five years if the Company is not able to file certain product submissions to the FDA prior to the five-year expiration date. Furthermore, these option awards to the Company’s product consultants do not vest unless certain product submissions are made to the FDA, and accordingly, the Company has not recorded any expense for these contingently vesting option awards to its product consultants.

For the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company’s total stock-based compensation expense was $~~836~~ ~~and $714, respectively. Of these amounts, $691~~ ~~and $651~~ ~~was recorded in general and administrative expenses, respectively, and $145~~ ~~and $~~63 ~~was recorded in research and development expenses, respectively.~~
~~For the six months ended June 30, 2021 and 2020, the Company’s total stock-based compensation expense was $1,509~~1,083 and $~~1,079~~673, respectively. Of these amounts, $~~1,272~~995 and $~~976~~581 was recorded in general and administrative expenses, respectively, and $~~237~~88 and $~~103~~92 was recorded in research and development expenses, respectively.
15
~~Eton Pharmaceuticals, Inc.~~
~~Notes to Condensed Financial Statements~~
(~~in thousands, except share and per share amounts)~~
~~(Unaudited)~~
~~Note 8 — Share-Based Payment Awards (continued)~~

A summary of stock option activity is as follows:
Summary of Stock Option Activity
Shares
Weighted Average Exercise
Price
Weighted Average Remaining Contractual Term (Yrs)
Aggregate Intrinsic
Value

Options outstanding as of December 31, 2020 2,824,500 $ 4.05 8.3 $ 11,525
Issued 902,098 $ 8.61
Exercised (138,233 ) $ 2.39
Forfeited/Cancelled (12,500 ) $ 7.31
Options outstanding as of June 30, 2021 3,575,865 $ 5.25 8.4 $ 6,335
Options exercisable at June 30, 2021 1,506,614 $ 4.21 7.7 $ 3,556
Options vested and expected to vest at June 30, 2021 3,525,865 $ 5.31 8.4 $ 6,096
Shares

Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Yrs)
Aggregate
Intrinsic
Value

Options outstanding as of December 31, 2021 3,513,719 $ 5.22 7.9 $ 2,711
Issued 1,123,770 $ 3.79
Exercised — $
Forfeited/Cancelled (45,312 ) $ 5.90
Options outstanding as of March 31, 2022 4,592,177 $ 4.86 8.2 $ 3,474
Options exercisable at March 31, 2022 2,301,894 $ 4.48 7.2 $ 2,444
Options vested and expected to vest at March 31, 2022 4,542,177 $ 4.90 8.2 $ 3,325

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock at March 31, 2022 for those stock options that had strike prices lower than the fair value of the Company’s common stock.

~~The assumptions used to calculate the fair value of options granted during the six months ended June 30, 2021 under the BSM were as follows:~~
~~Schedule of Assumptions Used to Calculate Fair Value of Options Granted~~
Expected dividends 0 %
Expected volatility 80 %
Risk-free interest rate 0.9 - 1.1 %
Expected term 5.3 – 6.3 years
Weighted average fair value $ 5.88
Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options granted to employees and directors, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally ten years). The expected term of options granted to non-employees equals the contractual life of the options.
Expected Volatility — Due to the Company’s limited operating history and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The Company has continued this methodology plus given some limited weighting to its own volatility in the periods subsequent to its November 2018 IPO. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.
~~Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options.~~
~~Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and therefore has estimated the dividend yield to be~~ 0.
~~Fair Value of Common Stock —The Company uses the closing stock price on the date of grant for the fair value of the common stock.~~
1615

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 8 — Share-Based Payment Awards (continued)

As of ~~June 30, 2021,~~March 31, 2022, there was a total of $~~8,242~~7,566 of unrecognized compensation costs related to non-vested stock option ~~and restricted~~ awards. InThe weighted average grant date fair value of stock option awards for the ~~six-month~~three-month period ended ~~June 30, 2021, there~~March 31, 2022 was $2.36 per share. There were ~~four~~ 0stock option exercises ~~which~~during the three-month period ended March 31, 2022. In the three-month period ended March 31, 2021, stock option exercises totaled ~~138,233~~75,000 shares at an ~~average~~ exercise price of $~~2.39~~1.38 per share with an intrinsic value of $~~661. There were four stock option exercises for~~ ~~69,878~~ ~~shares during the six months ended June 30, 2020 at an average exercise price of $1.39~~ ~~per share with an intrinsic value of $139~~416.

In December 2018, the Company’s board of directors ~~approved and~~ adopted an initial offering of the Company’s common stock under the Company’s 2018 ~~ESPP.~~Employee Stock Purchase Plan (the “ESPP”). The Company’s ESPP provides for an initial reserve of 150,000shares and this reserve is automatically increased on January 1 of each year by the lesser of 1% of the outstanding common shares at December 31 of the preceding year or 150,000 shares, subject to reduction at the discretion of the Company’s board of directors. As of ~~June 30, 2021,~~March 31, 2022, there were ~~500,009~~630,180 shares available for issuance under the ESPP.

The initial offering of the ESPP began on December 17, 2018 and ended on December 10, 2019. The annual offerings consist of two stock purchase periods, with the first purchase period ending in June and the second purchase period ending in December. The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per share that is at least the lesser of (1) 85% of the fair market value of a share of common stock on the first date of an offering or (2) 85% of the fair market value of a share of common stock on the date of purchase. After the initial offering period ended, subsequent twelve-month offering periods automatically commence over the term of the ESPP on the day that immediately follows the conclusion of the preceding offering, each consisting of two purchase periods approximately six months in ~~duration.~~duration.

~~For~~In accordance with the June and December stock purchase periods for the ESPP, there were 0share issuances in the first ~~six~~three months of ~~2021 and 2020 there were~~ ~~29,326~~ ~~and~~ ~~14,005~~ ~~share issuances under the ESPP.~~2022 or 2021. The weighted average grant date fair value of share awards in ~~the first six months of~~2022 and 2021 ~~and 2020~~ was $~~2.83~~1.37 and $~~2.43~~2.29, respectively. Employees contributed $~~135~~108 and $6680 via payroll deductions during the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. The Company recorded an expense of $4645 and $3319 related to the ESPP in the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the accompanying condensed balance sheets include $19130 and $922, respectively, in accrued liabilities for remaining employee ESPP contributions.

1716

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
~~(Unaudited)~~
~~Note 9 —~~ ~~Earnings (Loss) Per Share~~
~~Basic and diluted net income (loss) per share was calculated as follows:~~
~~Schedule of Basic and Diluted Net Income (Loss) Per Share~~
2021 2020 2021 2020
Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Basic net income (loss) per share:
Numerator:
Net income (loss) $ (2,016 ) $ (4,730 ) $ 3,100 $ (13,779 )
Denominator:
Weighted-average number of common shares outstanding, basic 25,211,277 21,004,910 25,132,776 19,574,164
Net income (loss) per share, basic $ (0.08 ) $ (0.23 ) $ 0.12 $ (0.70 )

Diluted net income (loss) per share:
Numerator:
Net income (loss) $ (2,016 ) $ (4,730 ) $ 3,100 $ (13,779 )
Denominator:
Weighted-average number of common shares outstanding, basic 25,211,277 21,004,910 25,132,776 19,574,164
Dilutive effect of stock awards and warrants — — 1,352,879 —
Weighted-average number of common shares outstanding, diluted 25,211,277 21,004,910 26,485,655 19,574,164
Net income (loss) per share, diluted $ (0.08 ) $ (0.23 ) $ 0.12 $ (0.70 )

Potential shares of common stock that were excluded from the computation of diluted earnings per common share as their effect was anti-dilutive:
Stock awards and warrants 4,266,079 3,307,335 1,624,598 3,972,785
(Unaudited)
~~There was no difference between the Company’s net income (loss) and the net income (loss) attributable to common stockholders for all periods presented.~~
18
Note 109 — Related Party Transactions

Harrow

Harrow was issued 3,500,000 shares of the Company’s common stock at the formation of the Company at the $0.001 par value per share price as the paid-in-capital contribution from Harrow. In April 2021, Harrow sold 1,518,000 shares of the Eton common stock it owned in an underwritten public offering. As of March 31, 2022, Harrow owned 1,982,000 shares of Eton’s common shares which represents 8.0% of the Company’s common shares outstanding. The Company and Harrow signed licensing agreements for two products developed by Harrow whereby Harrow assigned the product rights to the Company. In July 2018, the Company determined that one of the products was not viable for its portfolio of product opportunities and cancelled the licensing agreement whereby Harrow retains the product rights.

On May 6, 2019, the Company entered into an Asset Purchase Agreement (the “CT-100 Asset Purchase Agreement”) with Harrow. Pursuant to the CT-100 Asset Purchase Agreement, the Company sold all of its right, title and interest in CT-100 to Harrow, including any such product that incorporates or utilizes its intellectual property rights (a “Product” or, collectively, “Products”). Pursuant to the CT-100 Asset Purchase Agreement, Harrow will make certain payments to the Company upon the achievement of certain development and commercial milestones. In addition, Harrow is required to pay the Company a royalty in the low-single digit percentage range worldwide on a country-by-country basis on net sales for a period of the longer of 15 years from the date of the first commercial sale of a product in a particular country or the time that a valid intellectual property claim on such Product remains in force in the applicable country. The CT-100 Asset Purchase Agreement also contains customary representations, warranties, covenants and indemnities by the parties.
~~As part~~ To date, there have not been any sales of the ~~early start-up for the Company’s pharmaceutical business in 2017, key executives at Harrow received a total of~~ ~~1,500,000~~ ~~shares of restricted common stock in~~CT-100 product and therefore no earned royalties to the Company for ~~consulting services, and certain Harrow managers also received stock options to purchase a total of~~ ~~130,000~~ ~~shares of common stock from the Company (20,000~~ ~~of these options were forfeited in 2018). The restricted stock and stock options vested in full on April 30, 2018.~~this product.

19
~~Eton Pharmaceuticals, Inc.~~
~~Notes to Condensed Financial Statements~~
(~~in thousands, except share and per share amounts)~~
~~(Unaudited)~~
~~Note 10~~ ~~— Related Party Transactions (continued)~~
Additionally, the Chief Executive Officer of Harrow was a member of the Company’s board of directors until March 17, 2021 when he retired from service with the board. The Company issued 25,000 shares to the Harrow CEO in April 2021 after his retirement from the Company’s board associated with RSU’s that were previously fully vested.

In late March 2021, the Company closed its laboratory operation in Lake Zurich, Illinois and in May 2021 it reached an agreement for Imprimis Pharmaceuticals, a subsidiary of Harrow, to purchase its ~~our~~ lab equipment for $700which was $181above the ~~Companys’s~~Company’s net book value of the equipment.
17
Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)
Note 9 — Related Party Transactions (continued)

Chief Executive Officer

The CEO has a partial interest in a company that the Company has partnered with for its ~~EM-100~~EM-100/Alaway PF eye allergy product as described below.

The Company acquired the exclusive rights to sell the EM-100 product in the United States pursuant to a sales and marketing agreement (the “Eyemax Agreement”) dated August 11, 2017 between the Company and Eyemax LLC (“Eyemax”), an entity affiliated with the Company’s CEO. The Company also held a right of first refusal to obtain the exclusive license rights for geographic areas outside of the United States. Pursuant to the Eyemax Agreement, the Company was responsible for all costs of testing and FDA approval of the product, other than the FDA filing fee which was paid by Eyemax. The Company was also to be responsible for commercializing the product in the United States at its expense. The Company paid Eyemax $250 upon execution of the Eyemax Agreement, which was recorded as a component of R&D expense. Under the terms of the original agreement, the Company would pay Eyemax $250 upon FDA approval and $500 upon the first commercial sale of the product and pay Eyemax a royalty of 10% on the net sales of all products. The Eyemax Agreement was for an initial term of 10 years from the date of the Eyemax Agreement, subject to successive two-year renewals unless the Company elected to terminate the Eyemax ~~Agreement.~~Agreement.

On February 18, 2019, ~~The~~the Company entered into an Amended and Restated Agreement with Eyemax amending the ~~Eyemax~~Sales Agreement (the “Amended Agreement”). Pursuant to the Amended Agreement, Eyemax sold the Company all of its right, title and interest in EM-100, including any such product that incorporates or utilizes Eyemax’s intellectual property rights. Under the Amended Agreement, the Company assumed certain liabilities of Eyemax under its Exclusive Development & Supply Agreement with Excelvision SAS dated as of July 11, 2013, as amended (the “Excelvision Agreement”), with respect to certain territories and arising during certain time periods. Pursuant to the Amended Agreement, the Company ~~was obligated to pay~~paid Eyemax two milestone payments: (i) one milestone payment for $250upon regulatory approval in the territory by the FDA of the first single agent product ~~which was paid in October 2020~~ and (ii) one milestone payment for $500following the first commercial sale of the first single agent product in the ~~territory which was paid in February 2021.~~territory. Following payment of the milestones, the Company is entitled to retain all of the non-royalty transaction revenues and royalties up to $2,000 ~~(the~~(the “Recovery Amount”). After the Company has retained the full Recovery Amount, it is entitled to retain half of all royalty and non-royalty transaction revenue. The Company has realized $1,757 of the non-royalty and royalty revenue as of March 31, 2022. The Amended Agreement also contains customary representations, warranties, covenants and indemnities by the parties. The EM-100 asset and its associated product rights were sold to Bausch Health on February 18, 2019 and future potential royalties of twelve percent on Bausch Health sales of ~~EM-100,~~the product, named Alaway® Preservative Free by Bausch, which was approved by the FDA in September 2020, will be split between Eyemax and the Company. The royalty from Bausch Health is subject to reduction if a competitive product with the same active pharmaceutical ingredient is launched in the U.S. or if the ~~EM-100~~product’s U.S market share falls below a specified target percentage.
There were no amounts due to Eyemax under the terms of the Amended Agreement as of ~~June 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

2018

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 1110 — Leases

The Company recognizes a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, including operating leases, and separates lease components from non-lease components related to its office space lease.

The Company’s operating lease cost as presented in the “Research and Development” and “General and Administrative” captions in the condensed statements of operations was $0 and $2221, respectively, for the three months ended ~~June 30, 2021~~March 31, 2022 and $149 and $2021, respectively, for the three months ended ~~June 30, 2020. The Company’s operating lease cost as presented in the “Research and Development” and “General and Administrative” captions in the condensed statements of operations was $~~9 ~~and $~~43~~, respectively, for the six months ended June 30, 2021 and $~~28 ~~and $~~41~~, respectively, for the six months ended June 30, 2020.~~March 31, 2021. Cash paid for amounts included in the measurement of operating lease liabilities was $4320 for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The ROU asset amortization for the ~~three and six-month~~three-month periods ended ~~June 30,~~March 31, 2022 and 2021 was $20 and $49, respectively, and is reflected within depreciation and amortization on the Company’s condensed statements of cash flows. The ROU asset amortization for the three and six-month periods ended June 30, 2020 was $33 ~~and $~~6429, respectively, and is reflected within depreciation and amortization on the Company’s condensed statements of cash flows. As of ~~June 30, 2021,~~March 31, 2022, the weighted-average remaining lease term was ~~1.75~~1.0 years, and the weighted-average incremental borrowing rate was 5.4%.

The table below presents the lease-related assets and liabilities recorded on the balance sheet as of ~~June 30,~~March 31, 2021 (in thousands).
Schedule of Lease-related Assets and Liabilities
Assets Classification Classification
Operating lease right-of-use assets Operating lease right-of-use assets, net $ 143 Operating lease right-of-use assets, net $ 84
Total leased assets $ 143 $ 84
Liabilities
Operating lease liabilities, current Accrued liabilities $ 81 Accrued liabilities $ 79
Operating lease liabilities, noncurrent Operating lease liabilities, net of current portion 58
Total operating lease liabilities $ 139 $ 79

The Company’s future lease commitments for its administrative offices in Deer Park, Illinois as of ~~June 30, 2020 are~~March 31, 2022 is as indicated below:
Schedule of Future Lease Commitments
Total 2021 2022 2023 Thereafter Total 2022 2023 2024 Thereafter
Undiscounted lease payments $ 145 43 88 14 — $ 81 66 15 — —
Less: Imputed interest (6 ) (2 )
Total lease liabilities $ 139 $ 79

2119

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 1211 — Commitments and Contingencies

Legal

The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any pending or threatened litigation matters at this time that may have a material impact on the operations of the Company.

License and product development agreements

The Company has entered into various agreements in addition to those discussed above which are described below.

The Company acquired the exclusive rights to sell the Cysteine injection product in the United States pursuant to a sales and marketing agreement dated November 17, 2017 with an unaffiliated third party (the “Sales Agreement”). Pursuant to the Sales Agreement, the licensor is responsible for obtaining FDA approval, at its expense, and the Company is responsible for commercializing the product in the United States at its expense. The Company was to pay the third party 50% of the net profit from the sale of the product, however, in February 2020, it executed an amendment to the Sales and Marketing Agreement. Under the revised terms, the Company will be responsible for paragraph IV related litigation and will be entitled to 62.5% of product profit. The initial term is for the first 10 years following the first commercial sale of the product.

On February 8, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-202 License Agreement”) with Sintetica SA (“Sintetica”) for marketing rights in the United States to Biorphen® which is used for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia. The product was submitted to the FDA for review and subsequently received FDA approval on October 21, 2019. Pursuant to the terms of the ET-202 License Agreement, the Company is responsible for marketing activities and Sintetica is responsible for development, manufacturing, and the regulatory activities related to approval. The Company paid Sintetica a licensing payment of $2,000 upon execution of the ET-202 License Agreement and $750 upon the commencement of commercial product shipments. Sintetica ~~will supply~~supplies Biorphen to the Company at its direct costs and the Company ~~will retain~~retains 5% of net sales as a marketing fee. Sintetica is entitled to receive the first $500 of product profits. All additional profit will be split 50% to the Company and 50% to Sintetica. The ET-202 License Agreement has a ~~ten-year~~ten-year term from the first commercial sale of Biorphen which occurred in November 2019.

On February 8, 2019, the Company also entered into an Exclusive Licensing and Supply Agreement (the “ET-203 License Agreement”) with Sintetica for marketing rights in the United States to ephedrine HCl (brand name Rezipres®), an injectable product candidate for use in the hospital setting. Pursuant to the terms of the ET-203 License Agreement, the Company will be responsible for marketing activities and Sintetica will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory approval. The Company paid Sintetica a licensing payment of $1,000 upon execution of the ET-203 License Agreement which was refunded to Eton in early 2020 due to the FDA not accepting the ET-203 file submission by Sintetica. The ~~refund was reflected as a component of prepaid and other current assets on the Company’s balance sheet at December 31, 2019. The ET-203~~Rezipres product was successfully resubmitted in late 2020 and the Company ~~will pay~~paid a $600 milestone fee in July 2021 and ~~will also pay~~paid $750 ~~upon FDA approval and~~in April 2022 after the first commercial sale of the product ~~candidate. Upon approval,~~in March 2022. Sintetica ~~will supply ET-203~~supplies Rezipres to the Company at its direct costs. The Company ~~will retain~~retains 5% of net sales as a marketing fee. Sintetica ~~will be~~is entitled to receive the first $500 of product profits. All additional profit will be split 50% to the Company and 50% to Sintetica. The ET-203 License Agreement has a ten-year term from first commercial sale of ~~product.~~product which occurred in March 2022.

The three oral solution pediatric neurology product candidates discussed below, Topiramate, Zonisamide and Lamotrigine were developed by the Company and its various product candidate development partners and the Company subsequently sold all its rights and interests in these three products to Azurity ~~Pharmaceuticals, Inc. (“Azurity”)~~ in 2021. The Company has recognized $17,000 in milestone revenues to date from these three products and may receive up to $25,000 in additional milestone revenues related to FDA product approvals and the future sales levels for the products.

During the years ended December 31, 2021, 2020 ~~2019~~ and ~~2018,~~2019, the Company worked with Tulex Pharmaceuticals, Inc. (“Tulex”) as a third-party contract manufacturer to develop an oral solution for Topiramate (fka ET-101) which targets a neurological condition. The Company subsequently filed the product with the FDA in October 2020 and paid a $1,438 filing fee. In November 2021, the product received approval from the FDA and was launched by Azurity in December 2021. The Company recognized a $5,000 milestone revenue at launch which was reflected in accounts receivable on the Company’s balance sheet at December 31, 2021 and subsequently collected in January 2022.
2220

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 1211 — Commitments and Contingencies (continued)

On January 23, 2019, the Company entered into a Licensing and Supply Agreement (the “Agreement”) with Liqmeds Worldwide Limited (“LMW”) for Zonisamide oral liquid, a development stage product candidate (“ET-104”). Pursuant to the terms of the Agreement, the Company ~~was to be~~is responsible for regulatory and marketing ~~activities.~~activities and LMW ~~will be~~is responsible for development and manufacturing of ET-104. The Company paid the licensor $350upon execution of the Agreement and an additional $350after receiving successful bioequivalence study results, and $325upon the FDA’s acceptance of the NDA for review and will pay $325upon FDA approval of the NDA, $650upon issuance of patent covering ET-104 listed in the FDA’s Orange Book and $500in the event that product sales in excess of $10,000were achieved within a calendar year. In addition, the Company was required to pay the licensor 35% of the net profit from product sales. The Agreement was for an initial term of 10years from the date of the first commercial sale of the product. The Company was to retain sole ownership of the NDA after expiration of the Agreement.

On June 12, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-105 License Agreement”) with Aucta Pharmaceuticals, Inc. (“Aucta”) for marketing rights in the United States to Lamotrigine, an oral suspension product candidate for use as an adjunct therapy for partial seizures, primary generalized tonic-clonic seizures, and generalized seizures of Lennox-Gastaut syndrome in patients two years of age and older. Pursuant to the terms of the ET-105 License Agreement, the Company was to be responsible for marketing activities and Aucta will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory approval. The Company paid Aucta a licensing payment of $2,000 in August 2019 upon receiving an acceptance for review letter from the FDA and will pay $2,450 upon FDA approval and commercial sales of the product candidate and another $1,000 upon issuance of an Orange-book listed patent. If Aucta successfully completes a Lamotrigine product line extension product, Eton will pay $1,500 upon FDA acceptance of the product filing, ~~and~~ $~~1,950~~1,500 upon FDA approval and commercial sales of the extension product ~~candidate.~~candidate and $450 if the intellectual property for the extension product is transferred to Azurity. Aucta ~~will receive a low double-digit royalty on net sales and~~ will be entitled to receive milestone payments from the Company of up to $~~18,000~~3,000 based on commercial success of the product, including:

● $1,000 when net sales exceed $10 million in a calendar year
● $2,000 when net sales exceed $20 million in a calendar year
● $~~5,000 when net sales exceed $50 million in a calendar year~~
● $~~10,000 when net sales exceed $100 million in a calendar year~~

~~Eton will remain responsible for certain licensing fee obligations owed to its development partners and~~ Azurity ~~will assume~~has assumed royalty or profit share obligations owed to development ~~partners.~~partners as well as additional milestone payments based on sales volume targets.

On March 27, 2020, the Company entered into an Exclusive Licensing and Supply Agreement (the “Alkindi License Agreement”) with Diurnal ~~Limited (“Diurnal”)~~ for marketing Alkindi Sprinkle in the United States. Alkindi Sprinkle’s New Drug Application (NDA) was approved by the FDA on September 29, 2020 as a replacement therapy for pediatric adrenal insufficiency (AI), including congenital adrenal hyperplasia (CAH) in patients from birth to less than 17 years of age.

For the initial licensing milestone fee, the Company paid Diurnal $3,500 in cash and issued 379,474 shares of its common stock to Diurnal which were valued at $1,264 based on the Company’s closing stock price of $3.33 on March 26, 2020. The total amount of $4,764 was recorded as a component of research and development expense in the Company’s statement of operations for the ~~six months~~year ended ~~June 30,~~December 31, 2020. The Company will also pay Diurnal $2,500 if the product obtains orphan drug exclusivity status from the FDA.

On June 15, 2021, the Company ~~entered into a Distribution and Promotion License Agreement with Crossject S.A. (“Crossject”) for the~~acquired U.S. and Canadian rights to Crossject’s ~~ZENEO~~^®ZENEO® hydrocortisone needleless autoinjector, which is under development as a rescue treatment for adrenal crisis. The ~~product complements~~Company expects to submit the ~~Company’s Alkindi Sprinkle product which addresses pediatric adrenal insufficiency.~~New Drug Application (NDA) to the FDA in 2023 and plans to request orphan drug designation. The Company paid Crossject $500 upon ~~execution~~signing, $500 in March 2022 upon a completion of ~~the agreement~~a successful technical batch which ~~has been included in~~is reflected as a component of research ~~and~~& development expense in the Company’s condensed statements of operations for the period ended March 31, 2022, and ~~will~~could pay ~~an additional~~up to $~~500~~4,000 ~~for technical batches of the product if the technical batches are completed by December 31, 2021~~in additional development milestones and ~~then another $500~~ ~~for registration batches if those are completed by December 31, 2022. The Company will pay Crossject $1,500~~ ~~upon FDA acceptance of the product filing and $2,000~~ upon FDA approval of the product. The acceptance and approval fees are subject to reduction if other hydrocortisone autoinjector intramuscular products receive FDA approval prior to the Crossject product. In addition, the Company will pay Crossject a 10~~percent royalty on net sales and one-time net sales milestone fees of~~ up to $6,000 in commercial milestones, as ~~indicated~~well as a 10% royalty on net sales.
On October 28, 2021, the Company acquired the U.S. marketing rights to Carglumic Acid Tablets. The product’s Abbreviated New Drug Application (“ANDA”), which is owned by Novitium Pharma, was approved by the FDA on October 12, 2021. The product is an AB-rated, substitutable generic version of Carbaglu®. The Company paid $3,250 upon signing and retains 50% of the product profits with the balance being distributed to the licensor and manufacturer. The Company launched this product in ~~the table below:~~December 2021.

2321

Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 1211 — Commitments and Contingencies (continued)
● $~~1,000 when net sales exceed $10 million in any four consecutive quarters~~
● $~~2,000 when net sales exceed $20 million in any four consecutive quarters~~
● $~~3,000 when net sales exceed $30 million in any four consecutive quarters~~
~~Indemnifications~~Indemnification

As permitted under Delaware law and in accordance with the Company’s Amended and Restated Bylaws, the Company is required to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its directors and officers. The Company believes the fair value of the indemnification rights and agreements is minimal. Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of ~~June 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.
Note 12 — Subsequent Events
On April 5, 2022, the Company amended its SWK Credit Agreement with SWK Holding Corporation (see Note 5).

2422

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with (i) our unaudited interim condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations Included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (the “SEC”) on March 16, ~~2021~~2022 (the ~~“2020~~“2021 10-K”).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan”, “seek” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider other matters set forth in our SEC filings including the Risk Factors set forth in Part I, Item 1A of our ~~2020~~2021 10-K.

Overview

We are a ~~specialty~~unique pharmaceutical company focused on developing, acquiring, and commercializing innovative pharmaceutical products ~~and~~that fulfill an unmet patient need. Since the formation of our company in 2017, we have ~~particularly targeted hospital injectable~~used our expertise in business development, regulatory, and ~~pediatric rare disease~~product development to assemble a diversified portfolio of eleven products. ~~We seek to improve the formula, delivery system, or safety~~Six of existing molecules in order to address unmet patient needs. We pursue what we perceive to be low-risk candidates where existing published literature, historical clinical trials, or physician usage has established safety and/or efficacy of the molecule, thereby reducing the incremental clinical burden required for us to bring the product to patients.
In October 2019, we received FDA approval for Biorphen® which we are marketing in the United States. Biorphen (phenylephrine HCl injection) is an alpha-1 adrenergic receptor agonist indicated for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia. In September 2020,our products have been approved by the FDA ~~approved~~and commercially launched. We plan to continue growing our ~~Alkindi Sprinkle~~business through the acquisition of additional late-stage, high-value product as a replacement therapy for pediatric adrenal insufficiency (AI), including congenital adrenal hyperplasia (CAH) in patients from birth to less than 17 years of age. In addition, the FDA approved EM-100, an eye allergy product which we sold to Bausch Health whereby we will receive royalties on sales of EM-100 which was launched in late January 2021. We received a $1,500 milestone payment from Bausch in accordance with the product launch for EM-100. In February 2021, we sold three pediatric neurology products we had under development to Azurity Pharmaceuticals (“Azurity”) and have received $12,000 in proceeds. We anticipate additional revenues from Azurity based on various product-related milestones including the commercial launch for these products which are currently under review with the FDA.
We have established a diversified pipeline of product candidates in various stages of development, including multiple candidates that have been submitted to the FDA for review. Our product candidates are primarily focused on two core areas: hospital-based products and pediatric rare disease products. We believe these candidates can address situations where patient needs are not being met by current FDA-approved products.candidates.

Results of Operations

For the ~~three-month period~~three months ended ~~June 30, 2021~~March 31, 2022, we had ~~$3,067~~$2,176 in ~~revenues mainly~~revenue from ~~the Azurity milestones revenue of $2,500 discussed above plus $567 in~~ product sales and royalties which generated a ~~total~~ gross profit of ~~$2,931 for the period.~~$1,458. We ~~realized $20 in net sales~~had total revenue of ~~Biorphen~~$11,897 for the three-month period ended ~~June 30, 2020 at a negative gross profit of $8 mainly as a result of the impact of the COVID-19 pandemic~~March 31, 2021 which ~~adversely impacted our promotion and in-person sales call activity.~~
~~For the six-month period ended June 30, 2021 we realized $14,964 in revenues mainly from the $14,000 of~~reflected Azurity and Bausch ~~and other~~ milestone revenues ~~discussed above~~for $11,000 plus ~~$964 of~~ product sales and ~~royalties~~royalty revenues which generated a total gross profit of ~~$13,238~~$10,307 for the period. Revenues for the six-month period ended June 30, 2020 of $119 in net sales of Biorphen at a negative gross profit of $11 mainly as a result of the impact of the COVID-19 pandemic which adversely impacted our promotion and in-person sales call activity.

25
Research and Development Expenses

For the ~~three-month periods~~three months ended ~~June 30, 2021 and 2020,~~March 31, 2022 we incurred ~~$1,990 and $1,609, respectively,~~$1,618 of research and development expenses (“R&D”) ~~expenses.~~as compared to the $886 for the same period in 2021. The ~~R&D expense reflects an overall $381 higher expense level in 2021 mainly~~increase was primarily due to ~~increased spending~~a $500 technical batch milestone fee to Crossject for ~~general~~Zeneo hydrocortisone autoinjector development and continued development efforts for our other new product ~~development partially offset by decreased laboratory expenses in the 2021 period.~~
For the six-month periods ended June 30, 2021 and 2020, we incurred $2,876 and $7,877, respectively, of R&D expense. The 2020 period included $4,764 in expense for the licensing payments for the U.S. rights to Alkindi® Sprinkle. The six-month R&D expense reflects an overall $5,001 lower expense level in 2021 mainly as a result of the licensing payments noted for Alkindi Sprinkle in 2020. We discontinued our laboratory operations at the end of March 2021.candidates.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist primarily of employee compensation expenses, legal and professional fees, product marketing expenses, distribution expenses, business insurance, travel expenses and general office expenses.

For the three-month periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ we incurred ~~$3,266~~$4,927 and ~~$2,921,~~$4,058, respectively, of G&A expenses. The ~~$345~~$869 increase in G&A expense was mainly due to increased compensation expenses to support our product ~~marketing/distribution~~sales growth and ~~selling~~increased legal expenses on our Paragraph IV patent challenge related to L-Cysteine, partially offset by reduced product marketing expenses related to Alkindi Sprinkle commercialization partially offset by a lower level of legal expenses from our initiating a Paragraph IV patent challenge against Exela Pharma Science’s Elcys product (cysteine hydrochloride injection) in 2020.commercialization.
For the six-month periods ended June 30, 2021 and 2020, we incurred $7,324 and $5,531, respectively, of G&A expenses. The $1,793 increase in G&A expense was mainly due to increased product marketing/distribution and selling expenses related to Alkindi Sprinkle commercialization partially offset by a lower level of legal expenses from our initiating a Paragraph IV patent challenge against Exela Pharma Science’s Elcys product (cysteine hydrochloride injection) in 2020.
~~Interest and other (expense) income~~
We had slightly higher interest expense level for the three and six-month periods ended June 30, 2021 as compared to the same periods in 2020 due to our borrowing an additional $2,000 under our SWK loan facility in August 2020.
~~We recognized a $181 gain from the sale of our laboratory equipment in May 2021 and also recognized a $365 gain from the forgiveness of our SBA PPP loan in May 2021.~~
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Liquidity and Capital Resources
As of March 31, 2022, we had total assets of $23.2 million, cash and cash equivalents of $15.2 million and working capital of $15.3 million. We ~~incurred a~~had previously capitalized our operations from the June 2017 private placement of approximately $20.1 million of Series A preferred stock which converted into shares of our common stock concurrent with our IPO in November 2018 and also the IPO which provided us with net ~~loss~~proceeds of $2,016 and $4,730 for the three-month periods ended June 30, 2021 and 2020, respectively. The decreased loss in the 2021 period was mainly a result of increased revenues of $3,047 which were partially offset by increased operating expenses as discussed above.$22.0 million. In addition, ~~the gain~~we entered into a Credit Agreement with SWK Holdings in November 2019 whereby we drew a $5.0 million loan amount at closing and an additional $2.0 million in August 2020. In March and April 2020, we received net proceeds of approximately $7.8 million from the sale of shares of our ~~laboratory equipment~~common stock, and in October 2020, we received net proceeds of approximately $21.0 million from a public offering of our common stock at an offering price of $7.00 per share. We believe that our existing funding, revenues from our approved products and additional milestone payments expected to be paid in 2022 will be sufficient for at least the ~~gain from the PPP loan forgiveness contributed to the decrease~~next twelve months of our operations. However, our projected estimates for our product development spending, administrative expenses and our working capital requirements could be inaccurate, or we may experience growth more quickly or on a larger scale than we expect, any of which could result in the ~~net loss for the period.~~depletion of capital resources more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support our operations.

We realized net income of $3,100 and a net loss of $13,779 for the six-month periods ended June 30, 2021 and 2020, respectively. The improvement in earnings in the 2021 period was mainly a result of increased revenues of $14,845 and lower product research and development spending partially offset by higher general and administrative expenses for sales/promotion activities to support the launch of Alkindi Sprinkle. In addition, the $181 gain from the sale of our laboratory equipment and the $365 gain from the PPP loan forgiveness contributed to net income for the period.
Cash Flows

The following table sets forth a summary of our cash flows for the ~~six-month~~three-month periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Six months ended
June 30, 2021

Six months ended
June 30, 2020

Net cash provided by (used in) operating activities $ 3,346 $ (10,070 )
Cash provided by (used in) investing activities 697 (4 )
Cash flows from financing activities 464 8,278
Change in cash and cash equivalents $ 4,507 $ (1,796 )

Three months ended
March 31, 2022

Three months ended
March 31, 2021

Net cash provided by operating activities $ 1,223 $ 3,715
Cash used in investing activities (15 ) —
Cash flows (used in) provided by financing activities (385 ) 103
Change in cash and cash equivalents $ 823 $ 3,818

The ~~improvement~~decrease in cash provided by operating activities was mainly ~~due to~~a result of the ~~higher operating earnings~~net income in the 2021 ~~that were~~period partially offset by changes in working capital as compared to the net loss in the 2022 period and favorable working capital changes ~~when compared~~– in particular, the collection of the $5,000 milestone from Azurity related to the ~~same period in 2020. Investing activities reflected the $700 sale of lab equipment in May~~December 2021 ~~and only nominal equipment spending requirements in 2020.~~product launch for EPRONTIA®. The ~~change in~~2022 financing activity ~~cash flows~~ was ~~primarily~~an initial payment on our loan principal (see Note 5) whereas the 2021 financing activity was the result of ~~the sales of our common~~ stock ~~for $7,756 in March and April 2020.~~option exercises.

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Critical Accounting Policies

Our condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our condensed financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses in our condensed financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 3 to our financial statements included herein, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We account for contracts with our customers in accordance with Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess whether these options provide a material right to the customer and, if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes.

We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Any amounts received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized as revenue within the twelve months following the balance sheet date will be classified as current portion of deferred revenue in our balance sheets. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet date are classified as long-term deferred revenue, net of current portion.

Milestone Payments – If a commercial contract arrangement includes development and regulatory milestone payments, we will evaluate whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur before recognizing the associated revenue. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.

Significant Financing Component – In determining the transaction price, we will adjust consideration for the effects of the time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services to the licensees will be more than one year.

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We sell Biorphen in the U.S. to wholesale pharmaceutical distributors, who then sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments of Biorphen represent performance obligations under each purchase order. We use a third-party logistics (“3PL”) vendor to process and fulfill orders and have concluded it is the principal in the sales to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. We have no significant obligations to wholesalers to generate pull-through sales. In addition, we sell our Alkindi Sprinkle product to one pharmacy distributor customer which provides order fulfillment and inventory storage/distribution services.

Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sell Biorphen at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. In addition, we pay fees to wholesalers for their distribution services, inventory reporting and chargeback processing. We pay GPOs fees for administrative services and for access to GPO members and concluded the benefits received in exchange for these fees are not distinct from our sales of Biorphen, and accordingly we apply these amounts to reduce revenues. Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Biorphen and our lengthy return period, there may be a significant period of time between when the product is shipped and when we issue credits on returned product. For our Alkindi Sprinkle product, we bill at the initial product list prices which are subject to offsets for patient co-pay assistance and potential state Medicaid reimbursements which are recorded as a reduction of net revenues at the date of sale/shipment.

We estimate the transaction price when we receive each purchase order, taking into account the expected reductions of the selling price initially billed to the wholesaler arising from all of the above factors. We have developed estimates for future returns and chargebacks of Biorphen and the impact of the other discounts and fees we pay. Our sales of Alkindi Sprinkle to our distributor are not subject to returns. When estimating these adjustments to the transaction price, we reduce it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.

We recognize revenue from Biorphen product sales and related cost of sales upon product delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership, and have an enforceable obligation to pay us. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, we do not believe they have a significant incentive to return the product to us. We store our Alkindi Sprinkle inventory at our pharmacy distributor customer location and sales are recorded when stock is pulled and shipped to fulfill specific patient orders.

Upon recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable. We monitor actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts end up differing from our estimates, we will make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment.

Stock-Based Compensation

We account for stock-based compensation under the provisions of Accounting Standards Codification (“ASC”) – 718 Compensation – Stock Compensation. The guidance under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant and record expense over the related service periods, which are generally the vesting period of the equity awards. Compensation expense is recognized over the period during which services are rendered by consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model (“BSM”).

We estimate the fair value of stock-based option awards to our using the BSM. The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods and the contractual life of the options. Expected volatilities are based on comparable companies’ historical volatility along with a limited weighting included for our own volatility subsequent to our IPO, which we believe represents the most accurate basis for estimating expected future volatility under the current conditions. We account for forfeitures as they occur.

2926

Prior to our initial public offering in November 2018, the fair value of the shares of common stock underlying our stock-based awards was determined by our board of directors, with input from management. Because there had been no public market for our common stock prior to the IPO, our board of directors had determined the fair value of the common stock on the grant-date of the stock-based award by considering a number of objective and subjective factors, including enterprise valuations of our common stock performed by an unrelated third-party specialist, valuations of comparable companies, sales of our convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of our capital stock, and general and industry-specific economic outlook. Following our IPO, we use the closing stock price on the date of grant for the fair value of the common stock.

Research and Development Expenses

R&D expenses include both internal R&D activities and external contracted services. Internal R&D activity expenses include salaries, benefits and stock-based compensation and other costs to support our R&D operations. External contracted services include product development efforts including certain product licensor milestone payments, clinical trial activities, manufacturing and control-related activities and regulatory costs. R&D expenses are charged to operations as incurred. We review and accrue R&D expenses based on services performed and rely upon estimates of those costs applicable to the stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from our estimates.

Upfront payments and milestone payments made for the licensing of technology for products that are not yet approved by the FDA are expensed as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.

Off Balance Sheet Transactions

We do not have any off-balance sheet transactions.
27
JOBS Act Transition Period

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) December 31, 2023, which is the end of the fiscal year following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve capital. We do not utilize hedging contracts or similar instruments. We are exposed to certain market risks relating primarily to interest rate risk on our cash and cash equivalents invested during the period and risks relating to the financial viability of the institutions which hold our capital and through which we have invested our funds. We manage such risks by investing in short-term, liquid, ~~highly rated~~highly-rated instruments. As of ~~June 30, 2021,~~March 31, 2022, all of our cash is in a non-interest bearing account due to the current low-interest rate environment. We do not currently have exposure to foreign currency risk.

3028

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

With respect to the ~~six-month~~three-month period ended ~~June 30, 2021,~~March 31, 2022, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period ended ~~June 30, 2021~~March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Certain factors may have a material adverse effect on our business, financial condition, and results of operations, and you should carefully consider them. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our results of operations and financial condition.

You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our ~~2020~~2021 10-K, which could materially affect our business, financial condition, cash flows or future results. The risk factors described in our ~~2020~~2021 10-K, which was filed with the SEC on March 16, ~~2021,~~2022, are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not ~~applicable.~~applicable

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The exhibits listed on the Exhibit Index are either filed or furnished with this report or incorporated herein by reference.
32

EXHIBIT INDEX

Exhibit
No.
Description

10.1 Credit Agreement by and among the Company, the Lenders party thereto, and SWK Funding LLC , as administrative agent dated as of November 13, 2019 and conformed through Third Amendment dated as of April 5, 2022.
31.1 Certification of President and Chief Executive Officer (Principal Executive Officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer (Principal Financial Officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1* Certifications of President and Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended ~~June 30, 2021,~~March 31, 2022, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Operations, (iii) the Condensed Statements of Stockholders’ Equity, (iv) the Condensed Statements of Cash Flows and (v) Notes to Condensed Financial Statements.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

3330

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ETON PHARMACEUTICALS, INC.

~~August 16, 2021~~May 12, 2022 By: /s/ Sean E. Brynjelsen
Sean E. Brynjelsen
President and Chief Executive Officer
(Principal Executive Officer)

By: /s/ ~~W. Wilson Troutman~~James R. Gruber
~~W. Wilson Troutman~~James R. Gruber
Chief Financial Officer
(Principal Financial Officer)

3431

	Shares		Amount		Capital		Deficit			Equity
	Common Stock				Additional Paid-in		Accumulated			Total Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balances at March 31, 2021		24,482,616	$	24	$	108,573	$	(87,042	)	$	21,555

Stock-based compensation		—		—		836		—			836

Stock option exercises		63,233				226		—			226

Employee stock purchase plan		29,326		—		134		—			134

Common stock issued related to restricted stock units		25,000		—		—		—			—
Proceeds from sales of common stock, net of offering costs
Proceeds from sales of common stock, net of offering costs, shares
Warrant exercises
Warrant exercises, shares
Issuance of common stock for product candidate licensing rights
Issuance of common stock for product candidate licensing rights, shares

Net loss		—		—		—		(2,016	)		(2,016	)

Balances at June 30, 2021		24,600,175	$	25	$	109,769	$	(89,058	)	$	20,736

	Six months ended June 30, 2021			Six months ended June 30, 2020			Three months ended March 31, 2022			Three months ended March 31, 2021
Cash flows from operating activities
Net income (loss)	$	3,100		$	(13,779	)
Net (loss) income							$	(5,330	)	$	5,116

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock-based compensation		1,509			1,079			1,083			673
Common stock issued for product candidate licensing rights		—			1,264
Depreciation and amortization		240			326			181			155
Debt discount amortization		73			50			36			36
Gain on forgiveness of debt		(365	)		—
Gain on sale of equipment		(181	)		—
Changes in operating assets and liabilities:
Accounts receivable		(255	)		473			4,675			(252	)
Inventories		—			(1,329	)		40			(106	)
Prepaid expenses and other assets		419			1,251			961			(846	)
Accounts payable		(822	)		1,378			(393	)		(583	)
Accrued liabilities		(372	)		(783	)		(30	)		(478	)
Net cash used in operating activities		3,346			(10,070	)
Net cash provided by operating activities								1,223			3,715

Cash provided by (used in) investing activities
Proceeds from sale of equipment		700			—
Cash used in investing activities
Purchases of property and equipment		(3	)		(4	)		(15	)		—
Net cash provided by (used in) financing activities		697			(4	)
Net cash used in investing activities								(15	)		—

Cash flows from financing activities
Proceeds from sales of common stock, net of offering costs		—			7,756
Proceeds from PPP loan		—			361
Proceeds from employee stock purchase plan and stock option exercises		464			161
Net cash provided by financing activities		464			8,278
Repayment of long-term debt								(385	)		—
Proceeds from employee stock option exercises								—			103
Net cash (used in) provided by financing activities								(385	)		103

Change in cash and cash equivalents		4,507			(1,796	)		823			3,818
Cash and cash equivalents at beginning of period		21,295			12,066			14,406			21,295
Cash and cash equivalents at end of period	$	25,802		$	10,270		$	15,229		$	25,113

Supplemental disclosures of cash flow information
Cash paid for interest	$	424		$	358		$	215		$	214
Cash paid for income taxes	$	—		$	—		$	—		$	—

Supplemental disclosures of non-cash investing activities:
Payable for product license fee							$	750		$	—

Year	Amortization Expense
Remainder of 2022		469
2023		625
2024		600
2025		475
2026		475
Thereafter		1,596
Total estimated amortization expense		4,240

Description of Warrants	No. of Shares		Exercise Price			No. of Shares		Exercise Price
Business Advisory Warrants		600,000	$	0.01			600,000	$	0.01
Placement Agent Warrants – 2017 Preferred Stock Offering		471,446	$	3.00			471,446	$	3.00
Placement Agent Warrants - IPO		414,000	$	7.50			414,000	$	7.50
SWK Warrants – Debt – Tranche #1		51,239	$	5.86			51,239	$	5.86
SWK Warrants – Debt – Tranche #2		18,141	$	6.62			18,141	$	6.62
Total		1,554,826	$	3.18(Avg	)		1,554,826	$	3.18 (Avg)

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Yrs)		Aggregate Intrinsic Value
Options outstanding as of December 31, 2020		2,824,500		$	4.05		8.3	$	11,525
Issued		902,098		$	8.61
Exercised		(138,233	)	$	2.39
Forfeited/Cancelled		(12,500	)	$	7.31
Options outstanding as of June 30, 2021		3,575,865		$	5.25		8.4	$	6,335
Options exercisable at June 30, 2021		1,506,614		$	4.21		7.7	$	3,556
Options vested and expected to vest at June 30, 2021		3,525,865		$	5.31		8.4	$	6,096

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Yrs)		Aggregate Intrinsic Value
Options outstanding as of December 31, 2021		3,513,719		$	5.22		7.9	$	2,711
Issued		1,123,770		$	3.79
Exercised		—		$
Forfeited/Cancelled		(45,312	)	$	5.90
Options outstanding as of March 31, 2022		4,592,177		$	4.86		8.2	$	3,474
Options exercisable at March 31, 2022		2,301,894		$	4.48		7.2	$	2,444
Options vested and expected to vest at March 31, 2022		4,542,177		$	4.90		8.2	$	3,325

Expected dividends		0	%
Expected volatility		80	%
Risk-free interest rate		0.9 - 1.1	%
Expected term		5.3 – 6.3 years
Weighted average fair value	$	5.88

Assets	Classification			Classification
Operating lease right-of-use assets	Operating lease right-of-use assets, net	$	143	Operating lease right-of-use assets, net	$	84
Total leased assets		$	143		$	84
Liabilities
Operating lease liabilities, current	Accrued liabilities	$	81	Accrued liabilities	$	79
Operating lease liabilities, noncurrent	Operating lease liabilities, net of current portion		58
Total operating lease liabilities		$	139		$	79

	●	$1,000 when net sales exceed $10 million in a calendar year
	●	$2,000 when net sales exceed $20 million in a calendar year
	●	$~~5,000 when net sales exceed $50 million in a calendar year~~
	●	$~~10,000 when net sales exceed $100 million in a calendar year~~

	●	$~~1,000 when net sales exceed $10 million in any four consecutive quarters~~
	●	$~~2,000 when net sales exceed $20 million in any four consecutive quarters~~
	●	$~~3,000 when net sales exceed $30 million in any four consecutive quarters~~

	Six months ended June 30, 2021		Six months ended June 30, 2020
Net cash provided by (used in) operating activities	$	3,346	$	(10,070	)
Cash provided by (used in) investing activities		697		(4	)
Cash flows from financing activities		464		8,278
Change in cash and cash equivalents	$	4,507	$	(1,796	)

	Three months ended March 31, 2022			Three months ended March 31, 2021
Net cash provided by operating activities	$	1,223		$	3,715
Cash used in investing activities		(15	)		—
Cash flows (used in) provided by financing activities		(385	)		103
Change in cash and cash equivalents	$	823		$	3,818

Exhibit No.		Description

10.1		Credit Agreement by and among the Company, the Lenders party thereto, and SWK Funding LLC , as administrative agent dated as of November 13, 2019 and conformed through Third Amendment dated as of April 5, 2022.

31.1		Certification of President and Chief Executive Officer (Principal Executive Officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer (Principal Financial Officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certifications of President and Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended ~~June 30, 2021,~~March 31, 2022, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Operations, (iii) the Condensed Statements of Stockholders’ Equity, (iv) the Condensed Statements of Cash Flows and (v) Notes to Condensed Financial Statements.

101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

	ETON PHARMACEUTICALS, INC.

~~August 16, 2021~~May 12, 2022	By:	/s/ Sean E. Brynjelsen
		Sean E. Brynjelsen
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ ~~W. Wilson Troutman~~James R. Gruber
		~~W. Wilson Troutman~~James R. Gruber
		Chief Financial Officer
		(Principal Financial Officer)